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Chinese gold consumption

The following is an edited version of an article I’ve written for sharpspixley.com – and was posted on that site on Friday, entitled: CHINA: SGE Gold withdrawals head for huge new record year. This year’s withdrawal figures passed the 2013 full year record a months ago already and at the current rate will exceed the previous record figure by around 400 tonnes by the year end – although there’s a chance the figure could be higher still as withdrawals tend to rise as we get closer to the Chinese New Year, which falls on February 8th in 2016.

The big growth in SGE withdrawals this year is demonstrated by the chart below from Nick Laird’swww.sharelynx.comwebsite which shows total withdrawals at the same time for the past seven years. As can be seen gold taken out from the Shanghai exchange have been growing strongly year by year apart from a blip in 2014. This year’s figure for week 47 is thus a massive 538 tonnes higher than at the same time last year and 382 tonnes higher than in the previous record 2013 year. As can be seen from the chart the growth in withdrawals accelerated hugely in 2013 compared with previous years – a trend which has continued pretty well since.

The Sharps Pixley article notes that although Shanghai Gold Exchange (SGE) weekly withdrawal figures seem to have fallen back a little from their heady July/August/September heights, when at times over 70 tonnes of physical gold were taken out of the Exchange’s vaults in a single week, this year’s total is still heading for a huge new record high. Total withdrawals so far this year to the end of last week (Dec 4th – the SGE reports withdrawals a week in arrears) have amounted to just under 2,405 tonnes after a figure of 42.6 tonnes in the latest reported week. The record full year withdrawals figure was back in 2013 when 2,181 tonnes were withdrawn – a figure which was already surpassed several weeks ago and with virtually four weeks of withdrawals still to come this year the full year total looks to be heading for the high 2,500s. For reference the full year SGE withdrawals figure in 2014 had fallen back somewhat to 2,102 tonnes – still comfortably the second highest year on record at the time.

It was also noted that SGE withdrawal figures do remain running well in excess of known Chinese gold imports plus domestic production so far this year (See: 2016 a crunch year for physical gold supply). The linked article suggests total gold availability of only around 2,100 tonnes for the full year (which includes a perhaps conservative estimate of around 200 tonnes from scrap sources). However China is extremely reticent about reporting all its import and gold supply figures, so it is conceivable the actual figure could well be higher still perhaps bringing it closer to the SGE withdrawals metric.

But be that as it may, and given the huge discrepancy between the SGE figures and those for Chinese domestic gold consumption from the major analytical consultancies, if one just looks at comparative SGE figures they will provide a great guide to the trend in Chinese domestic gold flows and consumption so these gold flows have thus been trending sharply higher this year. With the Chinese economy continuing to expand, even though at a much slower pace than in previous years, it would not be unreasonable to assume Chinese gold demand will continue to grow alongside the nation’s GDP. It will thus be interesting to see what next year brings.

As readers will know, China is going through a centrally planned restructuring of its economy which is moving away from being export and manufacturing driven to being domestic consumer and services oriented following a pattern much of the Western World took generations to accomplish, yet China is aiming to do this in a few short years. It is proving to be a painful process, but perhaps not so much for the Chinese themselves, but more for those who had been relying on ever-growing Chinese manufacturing growth as their primary market for raw materials to fuel manufacturing growth. Looking ahead China, having built new cities and a remarkable infrastructure, is well placed to build on these plans which will continue to see the domestic purchasing power of its people grow as more and more services type better paying jobs are created. Antiquated manufacturing plants are being closed down, particularly in the ongoing drive to reduce pollution which will perhaps put China at the forefront of new technological development, further enhancing its global position.

It is so frustrating when top bank analysts ignore the data from the Shanghai Gold Exchange (SGE) and instead rely totally on data from the World Gold Council as supplied by GFMS. The WGC admits itself that its figure of Chinese gold consumption ignores an important proportion of the gold flows into China. Thus in its latest analysis, Barclays comes up with the WGC line that China is back to being the world’s second largest gold consumer after India, having fallen from first place 1n 2013, and then bases its assumptions as to China’s gold consumption growth accordingly. Barclays Bank analyst, Suki Cooper, continues on this path and states that perhaps by 2020 China could be consuming half the world’s gold output. By our reckoning it already is – and more!

Last year’s withdrawals out of the SGE, which by law handles all China’s gold imports and domestic production, came to 2,102 tonnes – down from 2,197 tonnes in 2013 – which is already equivalent to around two-thirds of global new mined gold output. Cooper relies on the WGC data for her analysis which puts Chinese consumption at a miserly 814 tonnes, but this ignores financial elements of demand and gold disappearing into the Chinese banking system which the WGC admits may be substantial. If these are not elements of ‘Chinese consumption’ – a matter of semantic interpretation of what is ‘consumption’ – they are certainly relevant as gold flows, and it is gold flows into Chinese hands which have to be the most important statistical data in terms of the global gold market.

This myth about Chinese gold consumption is perpetuated by mainstream media outlets, such as Bloomberg which appears to treat Hong Kong net gold exports to China as the country’s total import figure. Take this recent Bloomberg headline and read the article to understand what we are saying: China’s Gold Imports From Hong Kong Tumble 32% From Record. Reading the article one would assume that China’s total gold imports fell by 32% in 2014. But China moved the goalposts last year and allowed far more in previously controlled imports through other ports of entry. If one reads Swiss and U.S. official statistics in detail these show that well over 30% of gold exports from these two nations (and Switzerland is by far the largest exporter of gold to China) are now going directly to the mainland rather than via Hong Kong, and that is all-change since 2013. Indeed we reckon that perhaps as much as 36% or more of China’s gold imports are now coming in directly to the mainland rather than via Hong Kong. China itself doesn’t report these flows and Hong Kong probably wouldn’t if it hadn’t maintained its monthly statistical import/export data from the time it was a British colony. China remains a country of contradictions! But does Bloomberg mention this in its article? No!

We would guide you rather to analyses from China gold watcher Koos Jansen who writes for www.bullionstar.com and who works with what information is available directly from China including data published only in Chinese. His latest estimate of Chinese gold IMPORTS, in 2014 was at least 1,250 tonnes to which must be added China’s own gold production of 452 tonnes, plus scrap supply. On this estimate gold imports plus domestic production alone total at least 1,700 tonnes – still a little short of the SGE withdrawals of 2,102 tonnes for the year, but hugely in excess of the WGC consumption figure. These imports PLUS domestic production are being absorbed within China – gold exports are prohibited – so if this doesn’t represent Chinese gold consumption, what is happening to the perhaps 1,000 tonnes of gold that can’t be accounted for over and above the WGC figures!

Note: The WGC qualifies its data thus: “The flow of gold into China has far exceeded the amount needed to meet domestic jewellery and investment demand in recent years. The role of the commercial banks in using this gold for financing purposes has been well documented, including in our report, Understanding China’s gold market, and this activity expanded in 2014. To some extent, this helps explain why Shanghai Gold Exchange delivery figures are significantly higher than consumer demand.

One additional anomaly, which is not specifically related to WGC figures but to virtually all analyses of Chinese consumption, is where should we place Hong Kong’s own consumption which may be tiny in comparison with that of mainland China, but is significant nonetheless. After all Hong Kong is a Special Administrative Region of China, so surely its consumption should be lumped together with that of mainland China in assessing total Chinese demand? The WGC put this at 39.1 tonnes in 2014 so even on WGC figures, which we feel hugely understate the picture anyway, Chinese consumption, including that of Hong Kong, does indeed come out greater than that of India!

But back to the start of this article, given that the Barclays analysis suggests ever growing demand, if one takes what we see as the true gold flow into China of 2,100 tonnes in 2014 and increases this at a conservative 5% a year, we have China alone taking in perhaps 90% of global new mined gold output by 2020 – not 50% as the Barclays analysis suggests. Non-Chinese demand is perhaps around 2,500 tonnes a year, while global scrap supplies are currently around 1,100 tonnes. Even assuming there is no growth in either of these figures over the next five years, they do suggest a very substantial global gold supply deficit ahead, and growing given there are virtually no big new gold mines in the pipeline to replace aging existing operations and ever-falling grades. Even if this all stimulates a very significant gold price increase – far more than the $2,000 an ounce predicted in another report from ANZ bank analysts citing substantial Asian gold demand growth (doubling by 2030) – this can’t lead to substantial supply growth given the long lead times in bringing new operations on stream. Indeed significantly higher gold prices could even lead to gold output falling initially as existing operators are able to mine lower grades to preserve mine lives before any totally new production can kick in.

But, we would suggest, that a $2,000 gold price by 2025 and $2,400 by 2030 as the ANZ analysts suggest, given the likely enormous deficit in gold supply suggested by their consumption growth figures, again hugely underestimates the price potential should these demand figures come about – and in our view these figures may themselves well prove to be conservative given the potential wealth growth in China and India, as well as in other gold-hungry nations over the next decade.